Question 1

When might earnings management become an ethical consideration?

Accepted Answer

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Question 2

What are free cash flows for a firm? What does it mean when a firm's free cash flow is negative?

Accepted Answer

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Question 3

A firm has operating income of $1,000, depreciation expense of $185 and its investment in operating capital is $400. The firm is 100% equity financed and has a 35% tax rate. What is the firm's operating cash flow?
A) $725
B) $795
C) $835
D) $965

Accepted Answer

The answer of A firm has operating income of $1,000,...

Question 4

Lemmon Inc. lists fixed assets of $100 on its balance sheet. The firm's fixed assets have recently been appraised at $140. The firm's balance sheet also lists current assets at $15. Current assets were appraised at $16.5. Current liabilities book and market values stand at $12 and the firm's long-term debt is $40. Calculate the market value of the firm's stockholders' equity.
A) $156.5
B) $112.50
C) $104.50
D) $144.50

Accepted Answer

The answer of Lemmon Inc. lists fixed assets of $100...

Question 5

What are the costs and benefits of holding liquid securities on a firm's balance sheet?

Accepted Answer

The answer of What are the costs and benefits of...

Question 6

LG 5 2-21 Statement of Cash Flows Use the balance sheet and income statement below to construct a statement of cash flows for Betty's Bakery Corp.

Accepted Answer

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Question 7

LLV Inc. originally forecasted the following financial data for next year: Sales = $1,000, Cost of goods sold = $710 and Interest expense = $95. The firm believes that COGS will always be 71% of sales. Due to pressure from shareholders, the firm wants to achieve a net income of $150. Assuming the interest expense will remain the same, how large must sales be to achieve this goal? Assume a 35% tax rate.
A) $1,403.82
B) $1,3009.18
C) $1,123.34
D) $1,296.51

Accepted Answer

The answer of LLV Inc. originally forecasted the following financial...

Question 8

All of the following are reasons that one should be cautious in interpreting financial statements except ____________.
A) Firms can take steps to over- or understate earnings at various times.
B) It is difficult to compare two firms that use different depreciation methods.
C) Financial managers have quite a bit of latitude in using accounting rules to manage their reported earnings.
D) All of these are reasons to be cautious in interpreting financial statements.

Accepted Answer

All the given options are valid reasons to be cautious when interpreting financial statements, as they highlight potential manipulations and differences in accounting practices that can affect the accuracy and comparability of financial data.

Question 9

A firm has sales of $690, EBIT of $300, depreciation of $40 and fixed assets increased by $265. If the firm's tax rate is 40% and there were no increases in net operating working capital, what is the firm's free cash flow?
A) $15
B) $75
C) -$45
D) -$55

Accepted Answer

Free cash flow is calculated as: EBIT(1-Tax Rate) + Depreciation - Increase in Fixed Assets. Here, EBIT(1-0.4) = $180, Depreciation = $40, Increase in Fixed Assets = $265. So, FCF = $180 + $40 - $265 = -$45.

Question 10

LLV Inc. originally forecasted the following financial data for next year: Sales = $1,000, Cost of goods sold = $675 and Interest expense = $90. The firm believes that COGS will always be 67.5% of sales. Due to increased global demand, the firm is now projecting that sales will be 20% higher than the original forecast. What is the additional net income (as compared to the original forecast) the firm can expect assuming a 35% tax rate?
A) $59.45
B) $195.00
C) $42.25
D) $74.00

Accepted Answer

The answer of LLV Inc. originally forecasted the following financial...

Question 11

GW Inc. had $800 million in retained earnings at the beginning of the year. During the year, the firm paid $.75 per share dividend and generated $1.92 earnings per share. The firm has 100 million shares outstanding. At the end of year, what was the level of retained earnings for GW?
A) $725 million
B) $917 million
C) $882 million
D) $807 million

Accepted Answer

The answer of GW Inc. had $800 million in retained...

Question 12

How do taxes influence how corporate managers' and investors' structure transactions and capitalize their companies?

Accepted Answer

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Question 13

ABC Inc. has $100 in cash on its balance at the end of 2009. During 2010, the firm issued $450 in common stock, reduced its notes payable by $40, purchased fixed assets in the amount of $750 and had cash flows from operating activities of $315. How much cash did ABC Inc. have on its balance sheet at the end of 2010?
A) $75
B) $140
C) $225
D) -$25

Accepted Answer

ABC Inc.'s cash at the end of 2010 is calculated as follows: Starting cash ($100) + cash from issuing stock ($450) - reduction in notes payable ($40) - purchase of fixed assets ($750) + cash flow from operations ($315) = $75.

Question 14

Which of the following statements is correct?
A) The bottom line on the statement of cash flows equals the change in the retained earnings on the balance sheet.
B) The reason the statement of cash flows is important is because cash is what pays the firm's obligations, not accounting profit.
C) If a firm has accounting profit, its cash account will always increase.
D) All of these statements are correct.

Accepted Answer

While the statement of cash flows and balance sheet are related, the bottom line on the statement of cash flows (the net increase/decrease in cash) does not necessarily equal the change in retained earnings on the balance sheet. Additionally, while having accounting profit is generally a good sign for a firm, it does not guarantee that the firm's cash account will increase, as there may be other factors affecting cash flow such as non-cash expenses or changes in working capital. The reason the statement of cash flows is important is because it shows how much actual cash a firm is generating or using in its operations, investing, and financing activities, which is what ultimately pays the firm's obligations.

Question 15

How would you explain to a friend why market value of a firm is more important to an investor than book value of the firm?

Accepted Answer

The answer of How would you explain to a friend...

Quiz 2: Reviewing Financial Statements

When might earnings management become an ethical consideration?

What are free cash flows for a firm? What does it mean when a firm's free cash flow is negative?

A firm has operating income of $1,000, depreciation expense of $185 and its investment in operating capital is $400. The firm is 100% equity financed and has a 35% tax rate. What is the firm's operating cash flow?

What are the costs and benefits of holding liquid securities on a firm's balance sheet?

LG 5 2-21 Statement of Cash Flows Use the balance sheet and income statement below to construct a statement of cash flows for Betty's Bakery Corp.

All of the following are reasons that one should be cautious in interpreting financial statements except ____________.

A firm has sales of $690, EBIT of $300, depreciation of $40 and fixed assets increased by $265. If the firm's tax rate is 40% and there were no increases in net operating working capital, what is the firm's free cash flow?

GW Inc. had $800 million in retained earnings at the beginning of the year. During the year, the firm paid $.75 per share dividend and generated $1.92 earnings per share. The firm has 100 million shares outstanding. At the end of year, what was the level of retained earnings for GW?

How do taxes influence how corporate managers' and investors' structure transactions and capitalize their companies?

Which of the following statements is correct?

How would you explain to a friend why market value of a firm is more important to an investor than book value of the firm?